China Central Bank Cuts Reserve Requirement to Boost Liquidity

China’s central bank announced to cut the reserve requirement ratio on Monday, the fifth time since last February, showing that the liquidity shortage outweighs fears on currency depreciation.

The People’s Bank of China cut the reserve requirement ratios by 0.5 percentage points after Chinese stock markets closed on Monday. The new policy will take effect on Tuesday and the total reserve ratio is 17 percent for most large Chinese banks now. Analysts estimated that the action would help banks to free up about 700 billion yuan to lend.

Chinese policy makers were in a dilemma in last few months. They were trying to ease credit to support growth without adding pressures on the weakening yuan. It is very difficult to balance the growth and the currency. Easing credit usually will push the country’s currency to go down. So the action shows that Chinese policy makers now concern more about the financial stability and economy growth.

The reduction also came after the crash of Chinese stock market on Monday. The Shanghai Composite Index dropped as much as 2.9 percent to 2687.98 on Monday as people were disappointed by a lack of specific measures to boost growth during the Group of 20 meetings in Shanghai. Investors hope the government would come up with some measures to bolster the slowdown economy. The concerns about the slowdown economy lead to further capital outflows and currency deprecation.

"Before the G-20 meetings, people expected stabilization policies and the central bank to make statements, but not too much happened," said Ronald Wan, chief executive officer at Partners Capital in Hong Kong. "People tend to cash out before the parliamentary meeting."

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